Let’s suppose that scientific evidence clearly shows at some point that carbon emissions into the atmosphere have to be severely curtailed. The developed economies are now “locked into” into various physical, infrastructural and economic patterns, which are “CO2 emission intensive”, centralized power grids, automobileization, chemical and energy intensive agriculture, fossil fuel generation of electricity. For example, the gains in CO2 emission reduction that could be realized from the use of biofuels is limited by the fact that the production of the crops to be used for biomass energy is itself energy intensive and thus creates greenhouse gas emissions. In the underdeveloped countries, on the other hand, there are large sectors of agriculture, both subsistence and commercial, which have not, as yet, modernized. The use of crops from such sectors affords a much greater reduction of greenhouse gas emissions. For example, according to the Center for Energy and Environmental Studies at Princeton University, the percentage of total electricity generated by utility companies that could have been produced from sugar cane alone using advanced gas turbines is 14.9% in Asia, 19.2% in Africa, 45.1% in Latin America and 200% in Oceania.

To take another example, the lack of centralized power grids in many areas of the Third World has the potential of rendering profitable many forms of energy that would not be as profitable in a developed economy, photo-voltaics, wind, geothermal and others. According to J. C. Hourcade (1981, see footnote below), in many parts of the developing world, the new forms of renewable energy, specifically biogas, photovoltaics, solar, ponds, and geothermy, would already be competitive, for such uses as:

– cooking, especially in rural areas;

– agricultural irrigation;

– hot water heating in temperate and cold regions;

– pumping water;

– agricultural machinery and commercial vehicles.

He maintains that, “on the whole modern sources of renewable energy have a market potential covering 40% of final demand” and, therefore, “new renewable energy energies no longer appear as the energy of the distant future, but as the more appropriate to solve the present crisis in rural areas.”

In fact, from the point of view of climate change, the less developed a country is, the more advantages it has in terms of environmentally sustainable development. For example, given the exigencies of climate change, and the law of comparative advantage, Central America and Africa should specialize in energy-intensive heavy industry. This is because Central America has geothermal power and Africa has local hydropower (see Samir Amin, Accumulation on a World Scale, 1974).

Industrialized countries could buy “emission rights” from less-developed countries if they want to continue emitting higher levels of CO2.

A “world climate bank” would allow industrialized nations to buy emissions quotas from countries with lower levels of CO2 output. Estimates show that the global trade in emissions quotas could generate annual revenues of between €30 billion and €90 billion ($45 billion and $129 billion). That money could then be used to help the world’s poorest countries to finance environmentally friendly economic development.

Methane traps heat up to 20 times more effectively than carbon dioxide, though it remains in the atmosphere for a shorter time. Scientists warn a leak of methane could be catastrophic to the environment.

Methane hydrate is already a threat, regardless of whether energy companies begin drilling for it. A paper published earlier this month in the journal Nature said a release of a 50-gigatonne reservoir of methane under the East Siberian Sea could accelerate climate change and cost the global economy up to $60 trillion. And that could happen solely due to warming temperatures in the Arctic.

Fracking

Hydraulic fracturing is the fracturing of rock by a pressurized liquid. Some hydraulic fractures form naturally—certain veins or dikes are examples. Induced hydraulic fracturing or hydrofracturing, commonly known as fracking, is a technique in which typically water is mixed with sand and chemicals, and the mixture is injected at high pressure into a wellbore to create small fractures (typically less than 1mm), along which fluids such as gas, petroleum and brine water may migrate to the well.

Some analysts have portrayed fracking as a technology (a la “cold fusion”) that can generate environmentally sustainable growth in the developed countries independent of Third World growth.

We disagree for three reasons.

Fracking can contaminate drinking water with toxic chemicals. (2) The methane released by fracking, has a far more potent greenhouse effect than CO2. (3) Even if fracking makes the West energy independent, Western growth ultimately needs markets in the developing countries.

Comment:

Fracking thus represents a “misplaced autarky” dream. The world economy is a certain kind of “traffic jam” which needs a new global growth pathway to exit the gridlock. This means global systemic change. Obama in 2009 made his Cairo Speech, attended the G20 Pittsburgh Economic Conference and the Copenhagen Climate Conference in December. He was groping towards such inclusive global systemic change in these three places but failed to deliver.

Islamic banking has grown rapidly around the world but the industry remains in its infancy in Africa; however that might be set to change, presenting the African banking market with a huge opportunity for growth, according to Wasim Saifi, Global Head of Islamic Banking, Consumer Banking, Standard Chartered Saadiq.

The Dubai Chamber of Commerce and Industry will launch the first Global Islamic Economy Summit in Dubai in November. The conference is aimed at bringing together leading thinkers and policy makers from around the world.

The Limits of Global Reaganomics and the Need for Global Pro-Third World Economic Institutions.

In our 1984 book “World Economy/Big Prediction” we predicted that barring some really revolutionary new technology of physical production (a la “cold fusion”), the future long-term engine of growth for the world economy would have to be modernization of the less developed countries. In making this prediction we used our observations on technology and the Solow economic growth model. The problem is that, despite the impressive growth in some Third World countries, the global institutions to facilitate this growth have not developed.

(For Cambridge Forecast Group book “World Economy/Big Prediction” from 1984 as mentioned above)

Basically, the current problems with the world economy, trade tensions, bubbles, cash crises, debt crises, etc. are caused by two global failures, (1) the failure to create a pro-Third World global fiscality that can stimulate Third World economies directly, (2) the failure of global urban and rural land reform in the developing world and the subsequent failure to expand the South’s internal market enough forcing them to rely on exports to the West.

To flesh out this point, let’s look at an updated history of the last 40 years.

(the original CFG book, “The Reagan Revolution and the Developing Countries” was written in 1992/1993. This updates that book.)

In the 1970’s, after the ’73 oil price rise by OPEC, the patterns of world growth were as follows: OPEC‘s enormous petrodollar surpluses were deposited in the money-center banks and they loaned out short-term to Third World countries on the theory that sovereign governments wouldn‘t default. This together with the commodity price boom kept Third World markets opened. The developed countries had recovered from the recession of the early 70’s and America’s budget deficit was small compared with what it was later to become. The problem was dollar inflation which had cooled down considerably, rose dramatically after the second oil price rise.

US policy now faced a dilemma. If it slammed on the monetary breaks it would make Third World debt unpayable and endanger the money-center banks. If it let the dollar inflation soar into double digit levels it would endanger the world economy. At the IMF meeting in Belgrade in the autumn of 1979, a solution was proposed. OPEC would use its petrodollar surpluses to convert short term Third World debt into long-term (lower payment) debt. This would sop up excess petrodollars and keep inflation down and also would keep Third World markets for Western products open. The hangup was the Saudi insistence that the PLO be given observer status at the IMF and that the US recognize the PLO. This was too politically controversial, so then Sec’y of the Treasury Paul Volcker flew back from Belgrade and slammed on the monetary breaks causing the Third World debt crisis to worsen.

Discussion of Western/OPEC cooperation continued until finally the Israeli invasion of Lebanon put the kibosh on it. The Reagan administration adopted a policy of drastic tax cuts, vastly increased military spending , running a huge budget deficit and trade deficit. In other words, the US became the borrower, consumer and importer of last resort (in the words of David Hale of Kemper Financial Securities) hopefully giving the Third World countries, while undergoing austerity, someplace to export to. By the mid-eighties this policy ran into the roadblock of rising protectionist sentiment in the US.

It was at this point that the “Reagan revolution” came up with the concept that was to dominate global development strategy. In order to explain this concept, it is important to observe that the “Reagan revolution” was not so much a revolution as it was a continuation and intensification of long-standing U.S. policy towards global economic growth. Since 1945, the US had historically run budget and trade deficits in order to act as “an engine of growth” for the rest of the world economy. The Reagan debt-led model of growth simply put this strategy into “full throttle” by an “order of magnitude” increase in the U.S. budget and trade deficits, and, in order to ward off inflation, financed the deficits by debt creation rather than by monetary creation.

The Reagan debt-led model of global growth, however unpalatable it might have seemed from a bookkeeping point of view, was in fact a bold and decisive strategy. For several years, it put the U.S. squarely back in charge of the world economy. and allowed the U.S. to break the international OPEC/West/LDC “gridlock” on global economic strategy. The world’s most important commodity was now, not oil, but the U.S. dollar. Commodity prices plunged. Large parts of the global economy were turned into a “global distress sale” and U.S. growth was financed from the “proceeds”. A significant portion of the Third World’s consumer markets were shut down and replaced by the U.S. consumer market. The world’s financial power and “market” power which had been dispersed between the U.S., Europe, Japan and OPEC was now pulled firmly back into the hands of the U.S. In short, Reagan’s response in 1982 to ten years of Western, OPEC and Third World bickering was: “You’ll do it my way. Even if I’m not quite sure what my way is yet.”

In other words, the U.S. was now able to set the agenda for discussions of global development strategy for the next decade.

The strategy towards North/South development that ultimately emerged from this U.S. dominance was the so-called neoliberal strategy. It’s most important feature was the initiation, in 1986, of a new round of global trade negotiations, the Uruguay Round, of the General Agreement on Trade and Tariffs (GATT). To give some background, the origins of the General Agreement on Tariffs and Trade (and of its stillborn predecessor, the International Trade Organization (ITO)) go back to American-British wartime discussions concerning the shape of the post-war world economy. Despite vigorous efforts by developing countries (in the Havana negotiations of 1947) the draft ITO Charter only “paid lip service to development concerns”. The GATT, a separate temporary agreement negotiated by 23 countries (which became permanent when ITO was never ratified), was even less receptive to the needs of the developing countries. Tariffs on trade in manufactures between developed countries were reduced substantially under the auspices of GATT, but products in which the developing world had a comparative advantage (such as textiles or agricultural products) received much less favorable treatment. In addition, when the developing countries diversified into industrial exports, they faced a proliferation of new discriminatory non-tariff trade restrictions directed specifically at them (such as the Multifibre Agreement which discriminated against Third World textile exports).

The basic thrust of the Uruguay Round was as follows: It had been estimated that the above restrictions on LDC exports to the West cost the Third World 500 billion dollars each year. The West would agree to abolish those restrictions, thus providing 500 billion dollars worth of economic benefit to the Third World. In return, the Third World would agree to:

– open up their service economies to imports;

– give wide autonomy to outside investment;

– agree to strengthen their patent protection of Western technologies, (thus, according to some critics, “locking in” Western advantage in these technologies).

According to the neoliberal strategy, such an agreement, and even the promise of such an agreement, would bring about a massive North/South capital transfer. This capital would be lured by the promise of access to Western markets, by cheap labor, and by a favorable climate for Western investment brought about by deregulation in the LDC’s. This flood of capital investment would, in turn, “jump start” the Third World economies, lead to a rising standard of living and open up markets for Western exports. The Third World would follow the path of the dynamic Asian LDC’s and would simultaneously break the cycle of slow growth, trade imbalances and fiscal deficits in the West. In the meantime, the West’s increased access to LDC service sector and high-tech markets, brought about by the GATT agreement, would reduce protectionist sentiment in the West.

“Cheap labor is drawing investment and production away from the industrial countries. Plentiful goods and materials are crowding the world markets, and annual exports from developing to industrialized nations have risen by $100 billion since 1989. A new economic order is being born. Eventually, the entire world should share the bounty of this new order. As nations develop, their need for imported goods rises, and worldwide demand grows. Multinationals expect the developing countries to become vast new markets by the end of the decade (for Western high tech, capital equipment and services, a la GATT) as productivity and incomes climb worldwide. History is on the side of the optimists.” (Editorial from Business Week, 8/2/93.)

To look at another aspect of this, the economist Robert Lucas maintains that the reason why underdeveloped countries are underdeveloped is that they have a small amount of “human capital” (individual and social labor productivity). And the economist Elhanan Helpman says that a developing country can increase its human capital by exporting to the markets of the developed countries. Going up against first world competition increases the developing countries “learning by doing” (increases human capital) However, Lucas counters by saying that the Third World as a whole cannot do this, because “there is a zero sum aspect, with inevitable mercantilist overtones, to productivity growth fueled by ‘learning by doing’’. What this means is that the vast majority of the human race cannot grow economically indefinitely simply by exporting to a small minority of the human race. In other words, (following Samir Amin) the internal market of the developing countries has to be expanded directly by urban and rural land reform and by a pro-Third World global fiscality that funds sustainable development projects in the Third World.

(Although Lucas underestimated the growth potential of the Third World and the willingness of the developed countries to absorb imports from the developing countries).

To continue with our history, the nativist backlash to the proposed GATT agreement was the Perot candidacy. When Perot turned out to be a nutcase, it was Clinton that benefitted from this sentiment.

And it was Clinton that passed the GATT legislation and the smaller but similar NAFTA (North American Free Trade Agreement). The problems began immediately. After the NAFTA agreement Mexico, under pressure from the Clinton administration, kept the Peso artificially high so that the US could have a trade surplus with Mexico in order to generate support for the GATT agreement. After the GATT agreement passed in 1994, Mexican debt built up attempting to keep its currency up but became unpayable and Mexico had to be bailed out by a special US fund, the Exchange Stabilization Fund.

After the passage of GATT, Clinton, to avoid wage nativism (fear of trade with low wage countries), talked up the Asian economies, saying that they were the “wave of the future”. In addition, the Southeast Asian countries pegged their currencies to the dollar which was weakening against the yen. Money surged into the Southeast Asian countries. As one investor put it “investing in Asia became a religion”

Meanwhile the Japanese yen was rising dangerously against the dollar endangering Japan’s exports to the US. In 1995, Japan took action to lift the dollar up (by buying US bonds) As the dollar rose, the Southeast Asian countries became less and less competitive and their economies collapsed in a wave of currency devaluations and their debt became unpayable. The IMF raised hundreds of billions of dollars to bail them out. Money flowed out of the Southeast Asian economies into the US, causing the internet bubble, and causing (a temporary) surge of US growth which (together with a tax rise) wiped out the deficit.

Under the Bush junior and Obama administrations, the US ran huge budget and trade deficits and printed an enormous amount of dollars. This kept US interest rates low and money flowed into the stock markets of the developing countries which had a higher rate of return. As a result, in the early 21st century, the developing countries were growing rapidly even as the developed countries stagnated. (And 500 million people were lifted out of poverty in the developing world).

However, in the spring of 2013, Fed Chief Bernanke said that the US was reconsidering its monetary policy and would stop its bond buying program (for fear of another real estate bubble like the one under Bush junior). The surge of money into Third World markets stopped on a dime. In fact, in June of 2013, the amount of money going into Third World markets dropped by over 90% from the month earlier. It remains to be seen whether the concerns about the health of the developing countries’ economies will cause the Fed to back off.

Lawrence Feiner and Richard Melson July 2013 Cambridge Forecast Group

CFG Comment on this Update, July/August, 2013:

“It looks like the Fed has backed off of its proposed monetary tightening, as we predicted (sort of) in the Blog update. In other words it has to overstimulate the American economy (and real estate market) in order to safeguard Third World solvency. By overstimulating U.S. asset prices–stocks and houses–the American consumer starts to spend as his 401k looks better and America absorbs more imports worldwide….going back to the American consumer as locomotive, absent a new locomotive. Also lower interest rates sends money to emerging markets.”

The proposed U.S. monetary tightening and actual Chinese monetary tightening have severely impacted emerging market currencies particularly in India and Southeast Asia, causing a currency crisis, forcing some of Asia backwards to a rehash of the 1997-8 “baht crisis,” only this is a worse and more widespread crisis.

Islamic banking has grown rapidly around the world but the industry remains in its infancy in Africa; however that might be set to change, presenting the African banking market with a huge opportunity for growth, according to Wasim Saifi, Global Head of Islamic Banking, Consumer Banking, Standard Chartered Saadiq.

The Dubai Chamber of Commerce and Industry will launch the first Global Islamic Economy Summit in Dubai in November. The conference is aimed at bringing together leading thinkers and policy makers from around the world.

CFG COMMENT: Islamic Finance is roughly speaking a kind of Muslim venture capital for Third World development based on profit-sharing.

World Climate Bank:

One example of a global fiscality, discussed above, would be a “world climate bank”:

aWorld Climate Bankwould allow industrialized nations to buy emissions quotas from countries with lower levels of CO2 output. Estimates show that the global trade in emissions quotas could generate annual revenues of between €30 billion and €90 billion ($45 billion and $129 billion). That money could then be used to help the world’s poorest countries to finance environmentally friendly economic development.

Fracking

Hydraulic fracturing is the fracturing of rock by a pressurized liquid. Some hydraulic fractures form naturally—certain veins or dikes are examples. Induced hydraulic fracturing or hydrofracturing, commonly known as fracking, is a technique in which typically water is mixed with sand and chemicals, and the mixture is injected at high pressure into a wellbore to create small fractures (typically less than 1mm), along which fluids such as gas, petroleum and brine water may migrate to the well.

Some analysts have portrayed fracking as a technology (a la “cold fusion”) that can generate environmentally sustainable growth in the developed countries independent of Third World growth.

We disagree for three reasons.

Fracking can contaminate drinking water with toxic chemicals. (2) The methane released by fracking, has a far more potent greenhouse effect than CO2. (3) Even if fracking makes the West energy independent, Western growth ultimately needs markets in the developing countries.

Comment:

Fracking thus represents a “misplaced autarky” dream. The world economy is a certain kind of “traffic jam” which needs a new global growth pathway to exit the gridlock. This means global systemic change. Obama in 2009 made his Cairo Speech, attended the G20 Pittsburgh Economic Conference and the Copenhagen Climate Conference in December. He was groping towards such inclusive global systemic change in these three places but failed to deliver.

Methane traps heat up to 20 times more effectively than carbon dioxide, though it remains in the atmosphere for a shorter time. And it’s highly volatile — oil companies, when installing rigs, usually try to avoid tapping methane hydrate deposits.

Methane hydrate is already a threat, regardless of whether energy companies begin drilling for it. A paper published earlier this month in the journal Nature said a release of a 50-gigatonne reservoir of methane under the East Siberian Sea could accelerate climate change and cost the global economy up to $60 trillion. And that could happen solely due to warming temperatures in the Arctic.

“Both former principals of the Cambridge Forecast Group, the authors have written a sharp challenge to prevailing economic thought, arguing that despite the chaos that seems to have enveloped the world economy since the end of the Cold War, the direction and development of world economic history is, in fact, quite predictable. Professors of economics and professional economists will find this book both appealing and important.” Read review.

Lawrence Feiner and Richard Melson, both former principals of the Cambridge Forecast Group, have written a sharp challenge to prevailing economic thought.

The authors argue that despite the chaos that seems to have enveloped the world economy since the end of the Cold War (as typified in the writings of Francis Fukuyama, Zbigniew Brzezinski, and Daniel Patrick Moynihan), the direction and development of world economic history is, in fact, quite predictable.

Proponents of controversial “New Growth Theories,” Feiner and Melson argue that human capital and knowledge are quantifiable variables that, using mathematical formulae, can be both identified and extrapolated to the future. Once identified, an economic future can be reasonably predicted. Their work leads them to conclude that a post-Cold War economic world will revolve around a rapid shifting of economic priorities, emphasizing the needs and contributions of the developing world.

This is decidedly not a book for beginners in economics. It is a dense, detailed read, full of equations; readers should take the authors seriously with their oft-repeated asides that knowledge of basic calculus will enhance a person’s ability to understand the book. Specialists will, to be sure, find the book’s argument thought provoking. But they are likely to be frustrated by the authors’ use of several competing styles of citation and the absence of a list of the works cited or bibliography to help the reader translate the citations. Both specialist and generalist alike will also be distracted by the number of typographical errors. (One must pause when reading a book on economics that misspells the name of Milton Friedman.)

Decidedly not a book on the Reagan Revolution (which receives only a few pages here), this book does dare the economic specialist to think outside the box, and to consider a theory that might well explain where the world economy is heading. For that, this provocative book has merit.

BlueInk Heads Up: Despite the typographical flaws, professional economists and professors of economics will find this book both appealing and important.

The Reagan Revolution and the Developing Countries (1980-1990):

A Seminal Decade for Predicting the World Economic Future

Lawrence Feiner and Richard Melson

iUniverse, 353 pages, (paperback) $23.94, 978-1-4620-6189-1

(Reviewed: May, 2012)

CFG Comment on the review:

Irony of ironies:

The “Blue Ink Review” service completely misunderstoodthe book.

They read the first chapter and saw the “big prediction” of the centrality of the developing world to global growth. Then they read the next two economic chapters and thought that the new growth theories described therein were a validation of our prediction when in fact they were the opposite of our prediction…

They thought they had read enough and stopped.

Actually we did use mathematical growth theory to predict the centrality of LDC growth.

The Solow growth model, the most tested and accepted predicts that there are two sources of economic growth in the world, namely (1) increase in total factor productivity (technology) (2) increase in population.

We pointed out that the populations of the West are stable and that, aside from information technology, there is a stalemate in total factor productivity in the West and therefore additional growth has to come from the developing countries.

So the review was not altogether wrong (if you substitute the Solow growth theory for the new growth theories).

Unfortunately the Blue Ink review, although very good, has, with its emphasis on mathematics and equations, significantly reduced sales of our book. We had expected that, since the book was entitled ” The Reagan Revolution and the developing countries,” the reviewer would skip over the first four non-Reagan chapters and go right to the last chapter on Reagan. instead the review actually plowed through the two difficult economics chapters and came up with a review based on them. In fact, aside from the mathematical second and third chapters, the book is very well written and highly readable, not a ”’dense read” as theBlue Ink review put it.